It’s tough to say now whether the US-China tariff conflict will turn into a full-scale trade war or it’s just a means to negotiate more balanced trade. Will get to know in next few months how things shape up. India though directly not impacted will still have a contagion effect, said Jinesh Gopani, head of equities at Axis Asset Management Company, in an interview with Falaknaaz Syed. If oil rises to $80 a barrel and the rupee depreciates further, the market could go for a correction or go sideways, he added. Excerpts:
What kind of second quarter earnings is expected? When do you expect a revival?
The first quarter earnings were a good surprise for some companies and for some sectors. I am bullish on the second and third quarter earnings. The festive season is about to begin and would run into the third quarter. In the first quarter, around 80-90 per cent of our portfolio stock of companies did well. The private banks continue to do well, the consumption basket barring consumer durables have done well. Despite disappointment from the auto sector, auto ancillaries did well. The numbers for technology companies were good too while pharma stocks were slightly positive. Rural India, micro India, capital goods also did well. The next six months need to be watched rather than deriving conclusions from the September quarter. We expect demand recovery in the third quarter, which will be a better metric to judge the recovery. Thus, despite the macros being weak, the overall micro economy continues to do well.
How are you reading the market? How do you see the valuations now and where do you see the index by end of year? What are the major global and domestic negatives that can weigh on the markets?
Valuations have been high due to foreign inflows in the 100-200 stocks that they like. But if the oil prices rise to $80 per barrel and the rupee depreciates then the market could go for a correction or go sideways. Currently, the midcap index (S&P BSE midcap index) is down 8.5 per cent year-to-date. Volatility will continue as emerging market economies are witnessing huge volatility.
Trade wars are having an impact on China and on emerging market currencies, which have been depreciating. Besides, the dollar getting stronger, which is also impacting emerging market economies, and other factors would create an indirect burden on the rupee. If the tariff war escalates further, the market will see additional pressure. On the domestic front, we are entering an election season. Besides, the interest rate hike and inflation worries could also weigh on the market.
We are cautious on the macro side but bullish on the stock specific growth momentum side. There could be a 4-5 per cent correction if these risks materialise.
In your key funds, what kind of returns have you clocked? Are you confident of repeating that performance over the next five years?
We have been buying into high growth companies that are delivering high RoE (return on equity) and are confident of consistent fund performance over a long-term period.
2019 is an election year for India and such years usually increase pressure on the government treasury and spur inflation. What’s your take?
You are right. Elections do increase the pressure on fiscal front and if oil prices also rise then upside risk to fiscal deficit and inflation can get accentuated.
Where do you see the rupee by end of year?
We expect the rupee to be in 73 levels by the year-end.
Which sectors are you bullish on? What are the big themes you are betting on this year?
Generally, we follow 3-5 years view on any story and currently we are bullish on private banks, select non-banking finance companies (NBFCs), information technology (IT), technology and consumption space.
What is your outlook on the banking sector in the light of the Insolvency and Bankruptcy Code? Resolutions have been slow at NCLT...
Overall, what has happened in the banking sector is incrementally positive, as it would go a long way in improving the country’s credit culture. New borrowers are aware that if they don’t pay the lenders they will lose control of their companies. More prudent laws are in place to help banks recover their dues. Since the IBC is a new law, issues will emerge and the judiciary will be strengthened to deal with emerging challenges and it will take some time for the system to understand and implement the process in a faster manner. Second, getting buyers is not easy due to the credit liabilities, understanding the market and the real value of the asset.
Bond yields have surged quite a bit. To what extent can this impact the market? How does rising bond yield impact your portfolio?
Bond yields are rising as oil prices have moved up quite a bit and the rupee continues to depreciate as the dollar is strengthening on anticipation of rate hikes by the US Federal Reserve. But we are still better off than our emerging market peers.
What do you expect RBI to do in October policy? What is your outlook on interest rates?
We expect the Reserve Bank of India (RBI) to raise the repo rate by 25 basis points in October policy to contain inflationary pressures.
Is the IPO market drying up?
The IPO (initial public offering) market has been slow since the last few months as the valuations were high. Now the valuations are coming off for good. The papers that are coming are not that big and mostly IPOs of small and mid-sized companies are being launched.
Otherwise. the IPO pipeline has been dry except for one or two big companies.
Do you see more pain for midcaps going ahead?
Yes, there is some pain for midcaps.
Bold trade barriers were imposed by the US on China, sparking retaliation from Beijing. Do you expect a full-blown trade war and what will be its impact on India?
It’s very tough to say whether it’s going into full-scale trade war or it’s just a means to negotiate more balanced trade. Will get to know in next few months how things shape up. India though directly not impacted will still have a contagion effect.